U.S. Mortgage Rates Rise With 30-Year Highest in Four Months

By Prashant Gopal
Jan. 31 (Bloomberg) -- U.S. mortgage rates rose for a
second week, increasing borrowing costs as tight supplies of
listings drive up home prices.
The average rate for a 30-year fixed mortgage was 3.53
percent in the week ended today, up from 3.42 percent and the
highest since September, McLean, Virginia-based Freddie Mac said
in a statement. The average 15-year rate rose to 2.81 percent
from 2.71 percent.
U.S. real estate is rebounding as traditional homebuyers
compete with investors for a shrinking inventory of homes. The
S&P/Case-Shiller index of property values increased 5.5 percent
in November, the biggest year-over-year gain since August 2006,
according to data released on Jan. 29.
“The rising prices are clearly a good thing for homeowners
at the same time they make housing more expensive for those who
don’t own but want to buy,” said Jed Kolko, chief economist for
San Francisco-based Trulia Inc., which operates an online
property-listing service....

Typically when the housing market starts to come out of a bottom all those people who were waiting to buy so that they would not lose money start getting worried that they have to buy soon or they will lose money. What you get is a period of pent up demand getting fulfilled. And once an uptrend gets established people stop waiting as long to buy. The sense of urgency goes up on the demand side. When this happens you start getting 10% increases yearly. Of course homes cannot go up more than inflation over the long term but when you are coming out of a major decline and a long period of no price increases following that, you can have a period of yearly 10% increases that can be sustainable for a long time. However there are factors that cause some markets to lag others. Locations that are popular for people to down size to in retirement often lag those areas that people move from when they retire. This is because these people need time to build up equity before they down size.

What I said about homes not going up faster than inflation over the long term may have been over simplistic. It is more accurate to say that home mortgage payments cannot go up faster than inflation over the long term. In other words, the amount the buyer can afford to pay for their mortgage payment has to track the rate of inflation of salary increases. A person cannot pay what they do not have the money to pay. However interest rates can cause the price of the home to fluctuate quite a bit for a given affordable mortgage payment. So if someone can afford the payment on a $300k home at 3% then they can afford the payment on a $150k home at 6%, approximately. Thus interest rates can cause the values of homes to fluctuate. That is why I have always contended that one should buy a home when interest rates are high and sell when they are low. That used to be true until recently as the Fed. has been intentionally trying to control the value of homes with interest rates rather than it being the other way around. It is the chicken before the egg scenario. How can you have a market that reacts to interest rates when the fed predicts this and adjust rates to keep it from happening.

My point being is that if the Fed. increases interest rates substantially that this housing recovery could be short lived. And then if the raising of rates by the Fed. causes the recovery to stall, that may cause them to lower rates again. It sounds like madness to me. You can't predict cycles anymore because the Fed. manipulates the cycles and you never really know what the Fed. may or may not do. It used to be that real estate cycles were as predictable as clockwork. But with all this wacky Fed. manipulation I'm no longer willing to predict the real estate cycles as confidently as I once was. So who knows when it is safe to buy a home anymore. Ask the Fed. Maybe they can tell you.

The price of homes is not controlled by short term rates.
Its controlled by long term rates. Hence QE1, QE2 and now QEForever
When the Fed stops buying bonds the prices of homes will fall again.

Once rates are higher people will fund their purchase with Adjustable Rate mortgages.
the lowerst interest rate mortgages tied to 1yr or 3yr treasuries.

This housing bubble is far from over in my opinion.
I live in suburban NY so real estate prices will differ but;
When I bought my first house I paid 2x my annual salary at the time. (1989)
my mortgage rate was 10.25%
it was enough to pay the bills, we clipped coupons , contributed to our savings, etc.
When I look at the price of homes today (post crash) and I meet the neighbors I am sure these young couples are not making 50% of what they are paying for these houses.
how do they live?
the price of the asset has got to come down more.

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